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Nigeria has committed an additional $550m to its newly-established $1bn sovereign wealth fund towards ramping up investment in power supply, part of sweeping reform aimed at boosting an economy beset with chronic electricity shortages.

The funds, which it raised from a $1bn eurobond issued last year, will be managed by the sovereign wealth fund to stimulate investment in the supply of natural gas for power stations, Ngozi Okonjo-Iweala, the minister of finance and economy said on Monday.

Uche Orji, head of the Nigerian Sovereign Investment Authority, said this in turn would help leverage investment from the private sector. One unnamed private equity group in the US has already agreed to put forward $2 for every $1 invested by the state fund, he said, potentially generating hundreds of millions of dollars more.

Nigeria has one of the lowest per capita national power supplies in the world, producing on average about 3,200 mega watts a day. The use of privately owned generators adds as much as 40 per cent to the cost of doing business.

Despite this, the economy has been growing at about 7 per cent a year, leading business executives to marvel at the potential of the country, with its 170m population, if it could harness its abundant supplies of natural gas to provide cheap power.

The money will also go towards boosting the liquidity of a bulk trading agency set up as an intermediary between electricity generating and distribution companies in the first phase of a $2.5bn power privatisation programme. This saw the government hand over legal control of 15 state-owned electricity companies to new private owners late last year.

The ability of the bulk trader to raise sufficient financing to operate has been one worry among potential investors in the privatisation programme, which is the most ambitious effort to harness private sector investment to end power shortages in Africa to date.

“This is money the bulk trader holds to show they can be an effective intermediary,” Mrs Okonjo-Iweala said.

The sovereign wealth fund was conceived principally to manage savings from the country’s 2.4m bpd oil industry. The government is using the fund to channel the eurobond into infrastructure investment, Mrs Okonjo-Iweala told the Financial Times, because it is “the premier investment management institution” in the country. Managed well, the funds would generate sufficient returns to cover interest payments on the eurobond, she said.

It has taken an epic battle over the past decade to get reforms under way, amid stiff resistance from those interests vested in corrupt state procurement procedures and opportunities that the ailing power grid provide to importers of the diesel required to fuel generating sets.

Under the privatisation process the state first broke up the dysfunctional former National Electric Power Authority and put 17 generating and distribution companies up for sale in December 2010. A second phase of the programme is now under way with the government selling 80 per cent of its stake in 10 generating companies that own near or already completed gas-fired plants.

The government estimates that meeting its target of producing 20,000mw by 2020 will require $3.5bn of capital a year.

There is continuing uncertainty however over the state of the infrastructure that private companies are acquiring. People involved in cleaning up the legacy of past mismanagement, say that staggering sums were spent on equipment that in some cases rotted at the docks, was sent hurriedly to the wrong destinations or in other cases never arrived.

There are additional concerns over the availability of gas, and over whether a new staggered tariff regime will allow private distribution companies to the right combination of price and risk taking for the capital they are investing.